Progressive taxation — let’s do it right

Raise Up Massachusetts' method is not the way to go

ON MAY 8, THE MASSACHUSETTS LEGISLATURE restarted the lengthy process that may put a constitutional amendment requiring a “millionaire tax” before voters in 2022.  

Advocates had hoped that the amendment would appear on the statewide ballot in 2018but the Supreme Judicial Court found a significant procedural error that prohibited it being placed before the electorate.  

That decision derailed several years of effort by a group called the Raise Up Massachusetts Coalition to impose an additional four percent state surtax on taxpayers who have income in excess of a million dollars. They’ve regrouped to try it again.  

We are lucky that the SJC precluded last year’s vote because, as I argued previously in CommonWealth Magazine, the millionaire tax is an idea with superficial appeal and substantive flaws. There are sound reasons and sensible ways to change our state constitution to permit a more progressive system but the proposed amendment does not soberly address the shortcomings of Massachusetts’ tax policy. The current restart of the amendment process is the time to do it right rather than retain the flawed policy and poor drafting of the millionaire tax proposal. 

Our current income tax is driven by Article 44 of the state’s constitution which was adopted in 1915. It requires that taxes be “levied at a uniform rate throughout the Commonwealth,” a so-called flat tax. The legislature can change the income tax rate but it cannot impose varying rates on filers with different levels of income. This year’s uniform rate has dropped slightly to 5.05%. 

In spite of Article 44’s boundaries, the Commonwealth has effectively mitigated the flat tax for people at the lower end of the income scale by using exemptions and tax credits. According to the Institute on Taxation and Economic Policy, the bottom twenty percent of filers in Massachusetts pay virtually no state income tax. The next twenty percent average 2.4 percent and not until the top fifth of filers is the effective tax rate 4 percent or more.   

The most powerful rationale to make taxes in Massachusetts less regressive does not stem from our current income tax structure. It arises from our sales, excise, and property taxes which have disproportionate impact on lower income citizens. Sales and excise taxes effectively take 4.8 percent of the family income of the poorest 20 percent. Property taxes take another 5.4 percent from the same group, meaning that more than ten percent of their income goes to state and local taxes even though they pay no state income tax.  

A reformer with the goal of helping our lowest income neighbors could certainly envision a constitutional amendment that would permit the legislature to design a more progressive tax structure and periodically modify it based on experience. Additional income tax revenue could enable a reduction of sales, excise, and property taxes in a way that would effectively lighten the burden on the poorest of our fellow citizens. A sensible amendment would also give the legislature flexibility to modify the Commonwealth’s revenue policy as circumstances evolve in the decades ahead. This means that a statutory framework is much better than inflexible constitutional language that is difficult to change.   

The Millionaire Tax amendment proposed by Raise Up Massachusetts allows none of that. In fact, it would forbid using proceeds from the four percent surtax to reduce the sales, excise, and other taxes that disproportionately burden low earners. The proposed amendment requires that any revenue derived from the millionaire surtax must “provide the resources for quality public education and affordable public colleges and universities, and for the repair and maintenance of roads, bridges, and public transportation.”  Advocates for the tax often simplify their argument as funding “public education and infrastructure.”  

This goal may appear straightforward but the amendment’s language, in its effort to preclude discretion, makes the potential implementation cloudy. For example, most state education spending flows through municipalities as part of the annual operating budget. Infrastructure spending is usually contained in occasional capital budgets which are normally funded by state issued bonds. Could the surtax revenue be used to pay interest and principal on those bonds?

Separately, among the most underfunded elements of our education and transportation systems are their pension funds. The Massachusetts teacher’s pension fund only has about 53 percent of the assets needed to fund its liabilities. The MBTA pension fund is more than a billion dollars short. Could the money go there? One can envision conflicting advocacy and litigation over issues like that. 

Another source of bewilderment is the language that limits infrastructure spending to “repair and maintenance.” This appears to mean that the surtax proceeds may not be used to build any new roads, bridges, or public transportation. Projects like the on-going Green Line extension into Somerville and Medford or the much discussed Blue Line expansion into Lynn do not constitute repairs. New highways and bridges are also out of the picture state-wide. Because the proposed amendment is drafted for political appeal rather than implementation efficiency, it would likely lead to significant confusion over its meaning. 

More broadly, the amendment contradicts its advocates’ claim that it is intended to use rich people’s money to mitigate the high tax burden on low income people in Massachusetts. Such mitigation is prohibited. Worse, there is not a coherent approach to increasing the income tax on high earners. The imposition of a flat surtax only on income over a million dollars bears no resemblance to a progressive tax system. A cogent policy would have modest increases in rate as income grows and would create a sense that our Commonwealth has an appropriate balance of burdens and benefits. 

The illogic of the millionaire tax becomes clearer when one looks at data on the distribution of income. The state Department of Revenue reports that in 2017 a total of 3,844,621 tax returns were filed. Of them, approximately one half of one percent reported income over a million dollars. The next half percent reported average income of $792,955. The top ten percent of filers averaged $482,302.  

For both symbolic and substantive reasons, a progressive income tax should ask more than a small fraction of the top one percent to contribute more to our public revenue. That would also have the benefit of asking people with income of ten or fifty million dollars to pay a slightly higher rate than lower level millionaires. A flat rate on everything over a million cannot pass as progressive. Is there any sensible rationale why people with three quarters of a million dollars in income shouldn’t pay a slightly higher rate than the people with a half million in income? And they could be at a lower rate than the millionaires. 

Our tax rates do not now make sense as income rises. The effective rate is essentially the same on everyone in the top twenty percent. This means that in 2017 the three quarters of a million people whose income exceeded $106,000 paid the same rate as the 20,159 filers who reported millions. An additional three quarters of a million people with income as low as $55,000 averaged a tax rate only four tenths of a percent lower. 

Massachusetts income tax policy should change. But no other state has anything like a flat millionaire surcharge in its constitution and it is risky for Massachusetts to do so. The obvious difficulty of changing century old inflexible language is a lesson that we should not do it again. The sound argument for a progressive income tax calls for careful constitutional language that would create a framework for legislative discretion within reasonable bounds over the next century.  

Meet the Author

Edward M Murphy

Guest Contributor

About Edward M Murphy

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.

About Edward M Murphy

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.

The sloppy language of the proposed amendment reflects the lax rationale behind it. The only influential thing about it is its name. “The Millionaire Tax” is intended to provoke anger and motivate voters to punish a small portion of the population who are seen as exploitive. This is Trumpian logic which fabricates bad public policy. There are powerful reasons in support of the argument to create a constitutional framework for the implementation of a sensible progressive tax in Massachusetts. Let’s do it right this time.     

Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Educational Facilities Authority.